Geometric Brownian motion with affine drift and its time-integral

Runhuan Feng, Pingping Jiang, Hans Volkmer

Research output: Contribution to journalArticlepeer-review

Abstract

The joint distribution of a geometric Brownian motion and its time-integral was derived in a seminal paper by Yor (1992) using Lamperti's transformation, leading to explicit solutions in terms of modified Bessel functions. In this paper, we revisit this classic result using the simple Laplace transform approach in connection to the Heun differential equation. We extend the methodology to the geometric Brownian motion with affine drift and show that the joint distribution of this process and its time-integral can be determined by a doubly-confluent Heun equation. Furthermore, the joint Laplace transform of the process and its time-integral is derived from the asymptotics of the solutions. In addition, we provide an application by using the results for the asymptotics of the double-confluent Heun equation in pricing Asian options. Numerical results show the accuracy and efficiency of this new method.

Original languageEnglish (US)
Article number125874
JournalApplied Mathematics and Computation
Volume395
DOIs
StatePublished - Apr 15 2021

Keywords

  • Asymptotics
  • Boundary value problem
  • Deometric Brownian motion with affine drift
  • Doubly-confluent Heun equation
  • Lamperti's transformation

ASJC Scopus subject areas

  • Computational Mathematics
  • Applied Mathematics

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